Lord Steel of Aikwood: Listening to the arguments that have been expressed so far, it appears to me that the noble Lords, Lord Lang and Lord Mackay of Ardbrecknish, are not singing from the same hymn sheet at all. The noble Lord, Lord Lang, made a convincing case for doing away with this miserly 3p varying power and opening the lid and allowing the Scottish parliament to do whatever it wants with regard to financial matters. He said this measure is a compromise. I agree with him that it is a compromise. However, if he casts his mind back to the 1970 proposals he will remember that one of the criticisms of the scheme that was put before the Scottish people was that there was no tax responsibility at all. As we all know, the whole of local government has operated on the basis of a minority element of tax responsibility while the majority of local government expenditure is provided by central government. As I said, the noble Lord is right to say this measure will be a compromise, but it is the compromise that was agreed in the constitutional convention. The

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Government have faithfully introduced legislation to implement it. One can argue for or against a 3p limit or a 4p limit or a 2p limit, but the 3p figure seems to allow a reasonable amount of flexibility to enable the Scottish parliament to do some of the things it may wish to do.

I say to the noble Lord, Lord Monro--I almost addressed him as my noble friend as he is a friend in a personal sense--that I do not share his view about the problems of cross-border transfer. I agree with him that if there were different rates of sales tax as in the United States people would cross borders. I agree with him on that. However, in the United States, neighbouring states have variations in income tax of up to 5p but people do not move their residences across federal state boundaries to take advantage of fluctuating income tax rates. I believe this issue can be greatly exaggerated. I do not believe that that situation will occur here. In any case, the constant assumption from the Conservative Benches on this subject is that the Scottish parliament will be full of financial idiots who will be utterly irresponsible and who will do daft deeds. That may happen. Who knows, we may have a Conservative parliament? However, I think that is unlikely. We must proceed on the assumption that rational men and women will use these powers sensibly. One of the reasons I so opposed the amendment which we fortunately defeated a moment ago is that the phrase,

"for the avoidance of doubt".

was mischievous, because the amendment proposed by the noble Lord, Lord Mackay, raised the question, when is a tax not a tax? The answer is, when it is a charge or a fee. I remember that the poll tax was called the community charge. I repeat my view that as regards devolved matters the Scottish parliament has total freedom to raise what charges, taxes, levies, tolls--call them what you will--it pleases. However, it will do so only with a sense of financial responsibility. At the end of the day, the Treasury will keep an eye on the public expenditure controls, as everyone has mentioned. The electorate will also wreak retribution on those who misuse financial powers.

I have a specific example in mind. My noble friend Lord Mackie of Benshie asked about dogs. There is a perfectly rational case, strongly supported by the farming community and by many in urban areas, for a dog registration scheme. Westminster has ducked that issue. However, there is no reason why the Scottish parliament cannot introduce such a scheme. If it introduces it, it will levy a charge and may decide to make a profit on it. I believe that would be a good idea. I believe the amendment of the noble Lord, Lord Mackay, would have cast doubt as to whether it would be able to do that. I believe that we should get on with the legislation, accept the 3p variation on the basic rate of income tax and allow the Scottish parliament to administer in a sensible way all the matters that we are devolving under this Bill. It will not act within the realms of fantasy, as the Conservative Party seems to imagine.

Baroness Hogg: I support a number of points made by my noble friends. In a spirit of pure helpfulness to the Minister I warn him against redeploying a fallacy in

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his responses, which is to rely on the Treasury to resolve this issue in practice. If, as I am sure will be the case, expenditure rises in Scotland and taxation rises to match it, and the Treasury seeks to control the situation by withdrawing grant, as I am sure it would be only too delighted to do, taxation would have to be increased further in Scotland. It would not come down. If the Minister wants evidence of that fact, he has only to look at the dynamics of local government finance over the past 20 or 30 years.

Lord Sewel: I am intimately acquainted with the dynamics of local government finance over the past 20 or 30 years. We should bear in mind that this very specific proposal was put to the Scottish people in the referendum on 11th September last year. We were absolutely open and straight with the electorate of Scotland at that time. We sought their specific endorsement, and they endorsed the proposal by over 60 per cent. We are committed to legislate to give effect to the proposals placed before the Scottish people in the referendum.

Perhaps I may attempt to explain how we arrive at the figure of 3p. On the one hand it seems to be ridiculed as being of no consequence, and on the other as bringing about the flight of everybody of any value and merit from Scotland. It is not my job to attempt to reconcile those two positions.

There was general dissatisfaction regarding the 1979 proposals--the point was referred to by the noble Lord, Lord Steel, and was made strongly by some distinguished members of the party opposite--that they would establish a destabilising talking-shop with no fiscal responsibility. It was said that that would lead to an assembly pressing for improvements in services but being unable to secure those improvements because the level of income allocated to it through the block grant would not enable them to be sustained; that the argument would arise: "We want to do it, we have the political will to do it, but Westminster won't give us the money. If we had the right to tax, we would do so; we should look the Scottish people in the eye, go to them, receive their endorsement and get on with the job".

I have some sympathy with that type of criticism. That is why we introduced a tax-raising power. However, the power we have introduced is specific and limited in order to balance that sense of fiscal responsibility with a recognition that we live in an integrated economy and macro-economic policy is a reserved matter. It would therefore be totally inappropriate for the whole tax-raising power indicated by the noble Lord, Lord Lang, to be devolved. Clearly, control over income tax rates is a major tool in the management of the economy. Therefore a balance had to be achieved, and that is what we sought to do. The 3p rate represents £450 million a year. I do not deride that amount, and I do not believe that the farmers of Scotland would deride it. It is slightly short of the total amount paid to Scottish agriculture every year by way of public support. It is about the same amount as the combined budgets of Scottish Enterprise and HIE. That amount of money can make a significant difference--

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slightly more than at the margin; it can make a significant difference across a range of activities in Scotland. If the Scottish parliament wished to use the power, it would have at its disposal an amount of money which cannot properly be called trivial. It would not, through its tax impact, disturb the macro-economic management of the economy. That is the way we arrive at the 3p figure. As the noble Lord, Lord Steel, indicated, it could have been 2p or 4p, but 3p seemed to create and sustain that balance.

Let us now turn to the £420 million/£450 million yield. The yield from the 3p rate will vary depending on the level of economic activity and on inflation. The best estimate we received when we produced the White Paper was £450 million. Subsequently the Inland Revenue was able to produce a more precise estimate, providing us with the figure of £420 million. That is merely a function of the increased sophistication of the ability of the Inland Revenue to provide a more accurate estimate of the yield.

Let us then turn to the slightly different argument, alluded to somewhat elliptically by the noble Lord, Lord Mackay of Ardbrecknish, relating to changes in the tax structure. As I have been at pains to point out, the present power is expressed purely in terms of 3p on the basic rate. We know that tax structures may change over time; there has to be a base reference point in order to know what amount of money should be raised after the tax structure has been changed. That is the reference back to the £420 million. It would then be a matter for the Treasury, in consultation with the Scottish parliament, to agree on a means by which, under a changed tax structure, as near an arrangement could be achieved representing the present 3p on the basic rate. So there is nothing strange, cynical or mischievous in the movement from 3p to £450 million, to £420 million. They all refer to the same thing.

5.15 p.m.

Lord Mackay of Ardbrecknish: I thank the Minister for giving way. I follow his argument--at least, I thought I did for a moment or two, but then I began to have doubts. If he is saying that the decision is made by the UK Treasury (by the Chancellor) to change the structure of income tax so that the basic rate takes in less than £420 million to £450 million, then some other way would be found. If the shortfall comes from other economic factors--perhaps a downturn in the economy, or fewer basic rate tax payers--does that imply that the procedures in the Bill to allow the Treasury to make changes will not run?